Hurdles to GrainCorp, ADM Deal

U.S. grain handler Archer Daniels Midland Co. will have to sweeten its 2.7 billion Australian dollar (US$2.79 billion) takeover bid for Australia’s GrainCorp Ltd., early investor reactions suggest, as a series of offers globally for grain assets drive up valuations for the country’s last significant independent agribusiness.

Once a quiet sector for mergers, grain traders are in hot demand. This year, Switzerland’s Glencore International made a $6.2 billion offer for Canada’s Viterra Inc. and Japanese trading house Marubeni made a $3.6 billion bid for Gavilon Group of the U.S.

Rapid urbanization and rising wealth in China and India, the world’s most populous nations, are driving demand for westernized diets. Global trade in wheat, barley and canola is expected to double by 2050, according to the U.S. Department of Agriculture and the International Grains Council.

In this environment, Illinois-based ADM’s offer to buy GrainCorp at 8.4 times earnings before interest, taxes, depreciation and amortization is low, say analysts. ADM, which already owns 14.9% of GrainCorp, is one of the four so-called ABCD firms that dominate the world’s trading of agricultural commodities. The others are Bunge Ltd., Cargill Inc. and Louis Dreyfus.

“We are suggesting that shareholders hold the stock for a potentially higher offer from ADM or from another party seeking a meaningful position in Australia,” said Belinda Moore, a Brisbane-based analyst at RBS Morgans. ADM is offering A$11.75 per share, but Ms. Moore believes a takeover price of A$13.90 a share is reasonable.

That would represent 9.7 times forecast earnings before interest, tax, depreciation and amortization, or Ebitda, for fiscal 2013.

According to RBS Morgans, in recent years, global grain deals, including acquisitions of Australian assets, have been completed at an average Ebitda multiple of 9.7 times.

“ADM is well positioned with a 14.9% stake, but whether the price is sufficient in the minds of the GrainCorp board or investors remains to be seen, particularly given the strategic importance of the business,” said Nigel Lake, joint chief executive officer at Pottinger, a Sydney corporate advisory firm.

Analysts say that if pushed by a competing bid, ADM could join forces with Wilmar International, a diversified Singapore agribusiness group in which it owns a 16% equity stake. A spokesperson for ADM wasn’t immediately available for comment. A spokeswoman for Wilmar said there were no plans to team up at the moment.

Fund managers said that the Australian government may also intervene. “I’d be surprised if a company like GrainCorp, which owns essential services and infrastructure for processing and transferring wheat from Australian farms to our export buyers, is bought without careful consideration from policy makers like the Foreign Investment Review Board,” said Rhett Kessler, a senior fund manager at Sydney-based Pengana Capital.

“First bids are never final, particularly for a unique asset like this.”

ADM says that with GrainCorp under its control, it would be better positioned to meet growing global demand for crops and food, particularly in Asia and the Middle East. Australia ranks behind only the U.S. among the world’s largest wheat exporters.

Antony O’Sullivan, head of corporate advisory work at Lazard in Sydney, believes that although a competing bid may be unlikely due to ADM’s strategic holding in the stock, rivals could play “spoiler” by buying a stake and using it as a tool to negotiate for specific sought-after assets.

Billionaire James Packer’s Ellerston Capital, which owns a stake, said it has accepted ADM’s offer, but for now, the majority of investors appear to believe there is more to come.

GrainCorp rose 43% to a record high of A$12.69 a share Monday, before closing at A$12.30 a share, 4.7% above ADM’s offer of A$11.75 a share. GrainCorp is likely to announce its view of ADM’s proposal before Nov. 15, when it releases results for the year to Sept. 30, a person familiar with the matter said.

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Deal Journal Australia is an up-to-the-minute take on the deals and deal makers that shape the Australian landscape, including mergers and acquisitions, capital raisings, private equity and debt markets. In short, wherever money changes hands. Deal Journal Australia is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s Gillian Tan is the lead writer, with contributions from other Journal and Dow Jones reporters and editors. Send news items, comments and questions to gillian.tan@wsj.com.

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